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Thursday, January 31, 2013

Nothing seems to change all that much at Danaher (NYSE:DHR). The company has a time-tested formula and business plan, and management executes it quite well. The value that this business creates tends to be obscured by GAAP
accounting rules, but the valuation shows that most investors
appreciate what the company can do. Though I believe management is
probably playing it conservative with 2013 guidance,
valuation is a little steep right now, even if you believe in the
company's ongoing ability to produce value for shareholders.

For a company that has generally been very good at what it does, Amazon (Nasdaq:AMZN) gets no small amount of flack for its strategic decisions. Whether it's the decision to compete with Apple (Nasdaq:AAPL)
in the tablet and digital media spaces, or its move into markets such
as business-to-business MRO retailing and cloud services, there's no
shortage of carping about Amazon's margins and its proclivities toward
"empire-building."

And yet, Amazon has been a painful company to
short. While there have been some notable swoons, the stock is up more
than 250% over the past five years - well ahead of eBay (Nasdaq:EBAY) and Google (Nasdaq:GOOG)
and on par with Apple's returns given the latter's recent fall from
grace. Though I've long been an Amazon bull and believe this company has
more innate margin and free cash flow (FCF) potential than the current numbers show, I think valuation is plenty rich for today.

Investing in Seagate (Nasdaq:STX)
is at least a little like playing chicken with a freight train. While I
don't want to entirely dismiss Seagate's potential to transition into
new products, technologies and end markets, the fact remains that its
core hard disk drive (HDD) market is facing a one-two punch from
increasing solid state drive (SSD) substitutions and a switch from PCs
to mobile devices, like smartphones and tablets. Although the HDD
business is not going to vanish, investors face the difficult prospect
of trying to get both the timing and the magnitude of the decline right,
as well as Seagate's ability to generate (and/or reinvest) cash during
that decline.

This earnings cycle has been relatively better than feared for most tech stocks so far, but VMware Inc. (NYSE:VMW)
is going to go down as a glaring exception. While fourth quarter
results were generally solid relative to expectations, the Street
absolutely hated what management had to say about lower overall growth
in 2013 and sales growth more heavily weighted to the second half. The
stock's nearly 20% drop as of this writing seems overdone, but VMware is
going to have to rebuild its credibility before valuation matters
again.

There's still life in Yahoo! (Nasdaq:YHOO),
but there's also still a long and difficult road ahead of the company.
Marissa Mayer has been at the helm for only a short time and fundamental
repositionings in strategy, culture, and so on do not happen overnight.
While Yahoo! most definitely faces serious threats from the likes of Google (Nasdaq:GOOG) and Facebook (Nasdaq:FB), the company has assets and opportunities that still offer some hope.

Wednesday, January 30, 2013

Right off the bat, I'll acknowledge that I have not been a fan of Eli Lilly (LLY),
nor has it been one of my preferred picks in Big Pharma. That didn't
keep the stock from doing well in 2012, though, and perhaps the one
saving grace to my anti-Lilly stance was that it didn't stand out from
others I liked better like Roche (RHHBY.OB), Sanofi (SNY) and Pfizer (PFE).

Taking
Lilly's financial performance at the end of 2012 into account,
particularly the strong cost performance, and factoring in the company's
deep bench of Phase 3 candidates, it's fair to say that Lilly could
have the best chance of carrying that 2012 momentum through 2013.
Although I'm still not a Lilly fan on balance, investors who have more
faith in this company's pipeline could have a lot to look forward to in
the coming 12-18 months.

With a large number of mid-sized and large-cap med-tech companies
outperforming the market over the last three months, it's fair to ask
how much of Boston Scientific's (BSX) performance is based on real conviction that the company has turned the corner and how much is based on a sector-wide
and market-wide melt-up. Fourth-quarter earnings and management
guidance give cause for optimism that Boston Scientific is finally
moving past its problems, but investors should not forget the
difficulties that come with trying to play catch-up in a fiercely
competitive market.

Although I recently suggested that Wall Street has already amply rewarded Procter & Gamble (NYSE:PG)
for its self-improvement potential, the company showed in its fiscal
second quarter results that it may still have more on the table. While
incrementally less momentum in developing economies could eventually
develop into another problem to address, P&G management is
simultaneously delivering on product innovation/introduction and cost
cutting.

What a difference a month or so makes. With investors happy to see
Congress play kick the can with the fiscal cliff, industrial stocks have
caught a second wind and done quite well over the last month. While Honeywell (NYSE:HON)
is a quality industrial conglomerate that often seems to get
overlooked, management's modest guidance for 2013 and the company's
mediocre free cash flow history don't really argue for aggressively chasing these shares at this point.

Wall Street spent much of 2012 buying into the housing recovery. From wood products companies such as Louisiana-Pacific (NYSE:LPX) (up 135%), to home builders such as PulteGroup (NYSE:PHM) (up 179%), to furnishings/fixtures manufacturers such as Masco (NYSE:MAS) (up 52%), quite a number of stocks tied to residential housing had significant recovery rallies in 2012. So, too, did Weyerhaeuser (NYSE:WY), a well-run company that includes timberland, wood products and real estate investment trusts.
While timberland is likely to remain a high-quality long-term asset,
and Weyerhaeuser is one of the better operators in the public market,
new investors should probably wait for a pullback.

Tuesday, January 29, 2013

I was a fan of Pfizer (PFE)
early in 2012, and the stock delivered good returns as it beat the
S&P 500. At this new, higher, price level it is a little harder to
have quite the same affection for the company. I do have respect for how
the company has streamlined - cutting costs, selling the nutrition
business to Nestle, and preparing for the spin-off of Zoetis. I also
think there are some worthwhile drugs both in the pipeline and early
launch phases. All that said, it's hard to be as excited about the
stock's value today, and I wonder if it's time for another large-scale
move to better position the company for long-term growth.

If Biogen Idec (BIIB)
follows the usual pattern, the launch of BG-12 for multiple sclerosis
isn't likely to generate huge investor enthusiasm (another example of
"buy the rumor, sell the news"). That's particularly true given
management's effort to take down the high end of BG-12 launch
expectations within the last month. Accordingly, while Biogen Idec is a
well-run franchise with a great niche in MS, and may well attract
attention from a larger pharma, the company may need another exciting
asset in its pipeline to keep up investor enthusiasm.

Forget about the copious amounts of cash flow that Microsoft (Nasdaq:MSFT)
generates. With Windows and Office still responsible for the lion's
share of the company's profitability, sales trends there drive the bus.
Although Microsoft continues to look too cheap, Windows 8 adoption
hasn't been great, and the stock may struggle to go anywhere fast in the
meantime.

The wait continues for Juniper Networks (NYSE:JNPR).
With much less exposure to enterprise customers, Juniper has been in a
holding pattern as service providers have dramatically slowed their
spending. For 2013, however, the company has several relatively new
products to drive better sales, and early signs point to that
long-awaited rebound in carrier spending. There are still big unknowns
regarding Juniper's long-term margin potential, but Juniper could still offer upside at these levels.

It's not uncommon for energy service stocks to do well around the turn
of the year. Maybe it's the optimism that a new year brings, or a
byproduct of the excitement that energy companies often try to drum up
about their drilling plans for the coming year. Whatever the case, Halliburton (NYSE:HAL)
has enjoyed a strong run since mid-November with shares climbing more
than 30%. Much as Halliburton's fourth quarter does validate some
long-term optimism about the business, investors may want to be careful
in just how enthusiastically they chase this name right now.

Monday, January 28, 2013

Reading Caterpillar's (CAT)
release and listening to the call, I get the sense of management
basically shrugging its shoulders and saying "heck if we know" when it
comes to the year ahead. I can't blame them in the least, as listening
to all manner of conference calls this earnings season has turned up a
wide array of feelings, impressions and outlooks for the
economy both now and for the rest of 2013. For better or worse, the
near-term outlook for Caterpillar is likely to be dominated by commodity
price trends, while the long-term value seems only so-so right now.

With December quarter earnings in hand, Apple (Nasdaq:AAPL)
is no longer perfect nor flawlessly reliable. Given the sheer scale of
the company and the never-ending deluge of articles, columns and
opinions on Apple, there's definitely some risk now from jilted and
scorned Apple lovers turning from their favorite stock. Though there's
considerable apparent value in the shares at this level, investors
should not ignore the risk that there could be a few more knocks to the
story before the stock retrenches and investors re-evaluate its
long-term potential.

There's no one right way for a company to report results to investors, but I believe Abbott Laboratories' (NYSE:ABT) reporting is significantly sub-standard given the approaching split into Abbott Laboratories and AbbVie (NYSE:ABBV).
Even worse, however, is the apparent state of Abbott Laboratories'
business. While I can support the idea that there's room for growth and
self-improvement, investors need to realize that Humira hid a lot of
defects and that Abbott may not be the top-notch company people
generally assumed it was.

Even some of the best-run companies in the world can make mistakes. McDonald's (NYSE:MCD)
started 2012 betting on a turn in the economy and consumer sentiment,
and tried to move customers up-market from its value offerings. That
didn't work, and the stock lagged for the year. While McDonald's has
retrenched around value and continues to deliver impressive profits,
investors' perennial support for this company rarely allows it to get
very cheap.

Saturday, January 26, 2013

Wanting to like a company or stock thesis can be very dangerous to your
portfolio returns, as you often fall into the trap of hearing only the
good news and giving the benefit of the doubt to numbers and
projections. That's one of my biggest concerns about LSI Corporation (LSI),
as I really like the company's long-term potential in server and flash
storage products. The revenue and margin potential is definitely there,
but the company's uneven historical performance and potential
competition calls for real leaps of faith in terms of future margins.

Friday, January 25, 2013

This has been a strange quarter for many tech stocks, as investors seem
relatively willing to give a pass to unimpressive guidance for the first
calendar quarter of 2013. That's fortunate for Microsemi (MSCC)
shareholders, as this company not only posted a small miss and weak
bookings for its quarter, but offered weak guidance for the next.
Microsemi can be a maddening and frustrating stock to own, but if
management stays on target with cost reductions and new product
introductions, the long-term rewards could be well worth some white
knuckles in the meantime.

There's no reason that Covidien (COV) "shouldn't" be
one of the top-performers in large med-tech, nor enjoy some of the best
multiples. If there's a more consistent performer (to the good side),
I can't immediately think of it, and management has built this company
to deliver strong performance on a lasting basis. Not buying these
shares a year or two ago goes down as a sizable regret in my personal
investing history, but I would caution investors to resist the
temptation to chase this name.

Value investors and tech stocks are typically an oil and water mix,
but I've had enough success with a value approach (or at least a GARP
approach) that I always keep an eye on interesting tech names. One of
the most interesting, albeit frustrating, names has been F5 (FFIV).

While
F5 has a legitimately impressive share of the ADC market and bold plans
to expand into nearby markets like security and diameter signaling,
sluggish product growth and an uncertain future for the ADC market make
this a tricky stock. Though Thursday's post-earnings rally doesn't
necessarily take it off the list as a potential buy, investor
expectations for product revenue re-acceleration may be upping the risk.

The earnings from tech/IT giant IBM (NYSE:IBM)
should give tech investors a little respite from the fear cycle going
into calendar fourth quarter earnings - at least until the next widely
followed company flames out with results and/or guidance. Not only did
IBM do quite well with revenue and margin performance, the company's
guidance for 2013 was both solid and not particularly back end-loaded.
These shares aren't particularly cheap, but IBM remains a reasonable
one-stop shop for investors seeking tech exposure.

The good news/bad news quarter from DuPont (NYSE:DD)
is looking incredibly typical for large multinationals this quarter.
DuPont saw positive volumes for the first time in more than a year, but
severe price erosion and sluggish guidance
are going to keep the celebrations muted. It's not hard to like the
company's balanced end-market exposures, but the vulnerable global
economy and DuPont's valuation keep the stock looking a little less than
perfect.

Even if the efficient market hypothesis has severe drawbacks and
deficiencies, it's still hard to imagine that the stock of a company as
large and well-followed as Google (Nasdaq:GOOG)
could be meaningfully undervalued. And yet, a long-term discounted cash
flow analysis suggests that it's at least possible. While Motorola's
operations will pressure margins and there's ample competition in
search, mobile and online ads, Google still looks like a stock to
consider in the tech space.

Thursday, January 24, 2013

Over the past year or so, investors have come back to the med-tech space
and pushed valuations back up to levels closer to historical norms.
Although that means a lot of easy money is gone, many of these companies
still hold worthwhile potential as long-term holdings. Among them,
Stryker (SYK)
may still be among the most interesting. Not only does this
well-regarded med-tech stock have an improving ortho market to exploit,
but the company is something of a free agent in terms of using M&A
to further expand its long-term revenue possibilities.

Being a 3M (MMM)
investor is no picnic. Sure, every sell-side analyst (and most
independent writers/analysts) is quick to praise the company's long
history of shareholder valuation creation and product innovation, but
then the "yeah, buts" start - it's not a fast grower, it's not
aggressive enough, it's not ruthless enough on costs, and so on. This is
all true to a point, and 3M is probably not the best pick for a fiery
second half economic rebound, but 3M remains a solid portfolio
cornerstone and a stock unlikely to disappoint long-term investors.

It's hard to find many companies that post better-looking financials than security specialist Check Point Software (CHKP).
While this company boasts significant market share, impressive
financials, and very strong technology, it does come up short in one of
the most critical metrics for tech stocks - top-line growth. With Wall
Street already expecting little from this company going forward, it may
be worth management's time to consider trading some margin or cash on
the balance sheet for a better shot at stronger growth numbers.

Surgical robot company Intuitive Surgical (ISRG)
has a habit of answering its skeptics. While investors fretted last
quarter over slowing procedure growth, the company rebounded well this
time and delivered a solid quarter almost across the board. Intuitive
Surgical has never been a cheap stock, and today's valuation still
assumes an aggressive adoption curve, but momentum seems to be back in
this name.

Apparently there's only so much even a generally passive board of directors can take before it feels the need to do something. Rio Tinto (NYSE:RIO)
has announced a large impairment charge for 2012 and the replacement of
its CEO - both largely tied to unsuccessful and wasteful expansion
/capital allocation strategies. Now it is up to new management to chart a
new path and improve returns in a more uncertain commodity climate.

Change at the Top
While
the phrasing of the press release from Rio Tinto was sanitized and
generic, I don't believe it is a stretch to suggest that Rio Tinto chose
to fire Tom Albanese, its CEO of nearly six years. Certainly,
Albanese's performance during his tenure gave cause to make a move.

Industrial and financial conglomerate General Electric (NYSE:GE)
did a little better than expected with fourth quarter results, but
overall revenue and order trends suggest that the company really hasn't
separated itself from the industrial pack. It's relatively easy to argue
that the company's fourth quarter performance takes some risk out of
the guidance
for 2013. But will there be enough momentum in business like aviation,
health care and oil/gas to carry the shares to another market-beating
performance in 2013?

Investors have been inconsistent in their approach to industrial
companies since the election and the late 2012 slowdown in the economy.
One of the winners has been Parker Hannifin (NYSE:PH),
as investors have bid up the shares of this leading fluid power systems
provider by more than 20% since their October lows. While Parker
Hannifin is likely to remain a consistent, well-run industrial company,
it's hard to find an attractive risk/reward balance at this time.

Wednesday, January 23, 2013

It was relatively easy to like St. Jude Medical (STJ)
in the low-to-mid $30s, but a sustained rally since late November has
taken away a lot of this company's relative discount. Now St. Jude faces
many of the same problems as most other large med-tech companies -
stressed and slow-growing major markets and potentially abundant
competition in emerging higher-growth markets. Although these shares are
not especially expensive, investors should temper their expectations at
these prices.

As long-term performers go, I hope to have many more stocks like First Cash Financial (FCFS)
before I'm retired as an investor, but I don't expect that I will.
Operational excellence and prudent aggressiveness has built this company
into a very strong company, and there are still substantial
opportunities to grow in the U.S., Mexico, and elsewhere in Latin
America. That said, the stock's valuation and slightly lower 2013
expectations may encourage investors to wait before piling into this
name.

Sometimes one of the best things an investor can do is pick up shares of
a quality company on a temporary problem in the industry. For instance,
investors who bought Lincoln Electric (LECO) below $40 are probably pretty happy that they did so. While the shares of laser optics and components maker II-VI (IIVI)
have been volatile, they historically haven't stayed very cheap for
very long. The question for investors now, though, is whether this is
another buying opportunity or whether II-VI's addressable markets have
changed in fundamental ways that will make this a disappointing stock
from now on.

Tuesday, January 22, 2013

With the Synthes acquisition done and Zytiga on the market, I don't think Johnson & Johnson (JNJ)
investors should expect too much additional flash in 2013. That may not
be such a bad thing, though, as this is a pretty good company that
would benefit from some serious "back to basics" operational
improvements. J&J is also looking like a like relative bargain, with
good growth in pharmaceuticals and opportunity for improved results in
the device business.

There's no question that Brazil remains a popular emerging/developing
market for international and global investors. Unfortunately, it's all
too common for long-term macro calls ("buy Brazil") to have only passing
relevance to particular sectors or companies. In the case of Brazilian
banks such as Banco Bradesco (NYSE:BBD), lower interest rates hold the potential for compressing net interest margins and bank profit/return on equity
(ROE) growth just as we've seen lately in the United States. While
investing money in Brazil may make sense today, Bradesco is not looking
like the best means of going about it.

The med-tech world has not been shy about accepting the notion that
future growth will be predicated, at least in part, on good exposure to
emerging markets. Stryker (NYSE:SYK) is the latest to back that view with cold cash, spending $764 million to acquire Chinese orthopedics company Trauson Holdings (OTC:TRHDF).
Coupled with improving fundamentals in the core recon market (hip/knee
replacements), Stryker continues to look like a solid stock in the
med-tech sector.

Energy is a cyclical market that seems to inspire despair in the worst
of times and frenzied elation in the best - and that's true for both
investors and companies alike. When an area gets hot, many companies
scramble in and pay almost whatever it takes to establish acreage, but
the economics don't always support this. I think this is worth
remembering in the case of Crimson Exploration (Nasdaq:CXPO)
- while the company's shift toward liquids is logical and the its Texas
acreage may well be undervalued, the ultimate profitability of these
operations gives some reason for pause.

Contrary to many expectations a year ago, the oil services business didn't see much improvement in 2012. While Schlumberger (NYSE:SLB)
is probably the best in the business, even it couldn't escape the
realities of tough demand conditions in North America. With pricing
weakness spreading in North America, can the international business grow
enough in 2013 to lead to better results and multiples for this company and the broader sector?

Monday, January 21, 2013

Question: Has Apple's Downfall Begun?Bear's Response
All good things come to an end, and perhaps Apple's (Nasdaq:AAPL)
status as the darling of the stock market has seen its peak. To be
clear, I'm not suggesting that Apple is about to see its revenue growth
reverse, nor am I suggesting that the company is teetering on some sort
of precipice of relevance. Rather, I simply believe that Apple's time as
a near-flawless executor has passed and that investors should not
expect the "all Apple, all the time" market mentality to persist.

There never has been anything particularly flashy about U.S. Bancorp (NYSE:USB),
and I don't think that will change in the conceivable future.
Consequently, this isn't always a stock that generates a lot of
excitement - management just goes about its business, building value
over time. That said, relative to the company's demonstrated returns and
earnings power, I continue to believe that U.S. Bancorp is an
undervalued bank stock that is worth buying and owning today.

Last year was a strange one in banking, as investors were somewhat lukewarm on quality banks such as U.S. Bancorp (NYSE:USB) and Comerica (NYSE:CMA), but more than happy to bid up still-troubled operations such as Bank of America (NYSE:BAC).
While it can be fairly argued that there aren't as many rocks left to
turn over (so, fewer negative surprises) and BAC management has been
grinding through its troubles and repairing its operations, I just don't
see the cause to get all that excited about the bank's prospects.

Something is oddly logical about the performance of Citigroup (NYSE:C) shares over the past year. While this bank clearly is not back to operating on par with banks such as JPMorgan (NYSE:JPM) or U.S. Bancorp (NYSE:USB), it's in better shape than Bank of America (NYSE:BAC)
in many respects. Accordingly, its 2012 stock performance seems fair in
the context of being about halfway between the "good banks" (which
matched or slightly beat the S&P 500) and the "troubled banks" that
saw significant share price appreciation.

That's all in the past,
however, and investors are now trying to digest a fourth-quarter report
that was surprising and disappointing in a few respects. With a new CEO
running the show, this may have been a "kitchen sink" quarter designed
to sweep away past problems. Still, it raises the specter of future
problems and reminds investors that these banks are still not out of the
woods.

Perhaps Fifth Third Bancorp (Nasdaq:FITB)
is a little too solid for its own good right now. With investors
worried about narrowing spreads and limited loan growth potential, much
interest in the sector seems to be turning toward companies with major
expense-cutting and credit improvement stories to tell. While Fifth
Third is already in pretty good shape, I think investors may yet be
underestimating the core growth potential in this bank.

Friday, January 18, 2013

While I understand that Wall Street is a discounting mechanism that
looks forward more often than backward, I have a hard time reconciling
the confidence that investors have shown in Johnson Controls (JCI) over the past three months with the likely trajectory of performance.

Johnson
Controls said many of the right things at its recent analyst day,
addressing issues like margin challenges in the automotive and building
systems businesses and pointing to a promising future in batteries, but
it seems like analysts are much too willing to reward the company with
unprecedented operating improvements. A slight beat for the fiscal first
quarter is certainly better than another miss, but back-loaded guidance
and iffy auto margins leave me hanging on to some skepticism.

I've complained in the past that BB&T (BBT)
doesn't always get its due in the sell-side community, and the stock's
so-so performance over the past year would seem to back that up.
Certainly there are legitimate questions to ask about the company's net
interest margin, return on equity, and capital deployment plans. At the
same time, though, the company has built an impressive franchise
footprint and has multiple levers to pull for incremental growth. On
balance, BB&T remains one of the more attractive risk-reward
prospects among the larger banks.

I've made no secret in the past of my respect for Linear Technology (Nasdaq:LLTC).
This specialist in high-performance analog (HPA) chips is not only one
of the largest analog chip companies; it boasts some of the strongest margins and long-term returns on capital in the industry.

Although
I believe the company is in a good position to meet growing demand in
the industrial and automotive categories, I'm less confident that its
business philosophy makes it a great pick for a chip rebound.

While 2011 was a pretty good year for quality banks, and 2012 was a
better year for lower-quality banks, 2013 will likely be a challenging
year for many banks. Commerce Bancshares (Nasdaq:CBSH)
has a relatively good mix of fee income and a solid commercial lending
business, but low yields on loans and securities will likely lead to
slow going over the next year or two. Though I think Commerce can
continue to do better than small rivals with more balance sheet growth and competitive share gains, it's hard to get fired up about the shares right now.

Thursday, January 17, 2013

When the economy slows, particularly the manufacturing sector, there isn't much Fastenal (FAST)
can do about it. By the same token, when "disappointing" results mean
that growth drops into the high single digits, you're still talking
about a very strong company. The issue with Fastenal has never been
about the strength of its growth, but rather the price investors pay for
that growth. Nothing has really changed in that respect - while other
MRO distributors like MSC Industrial (MSM) and DXP Enterprises (DXPE)
may have claims to GARP ("growth at a reasonable price") status,
Fastenal pretty much looks like a GAAP ("growth at ANY price") type of
stock today.

Even though they rarely get them nowadays, investors want clean reports from banks and PNC Financial's (PNC)
inability to deliver them has turned into an issue when it comes to the
stock's multiples and valuation. Where investors understand that Bank
of America (BAC) still has a big mess to clean up and generally believe U.S. Bancorp (USB) management when they call an item "one time," PNC has put investors through something more like "death by paper cuts."

The
good news for the PNC bulls is that this company's credit profile is in
generally good shape and commercial loan growth has been strong. On the
bearish side, though, is persistent spread pressure, increasing
competition, and incrementally more doubt about the company's long-term
return on equity potential.

Comerica (CMA)
hasn't always gotten its due, as analysts have in the past questioned
the company's heavy exposure to Michigan, its focus on commercial
lending, and how it went about gaining sizable exposure to California,
and Texas. Nevertheless, Comerica sits today as one of the strongest
mid-sized banks from the perspective of capital, and the company's
interest-sensitive makeup could really pay if rates start to rise.
Valuation makes this an interesting stock today, as the bank looks too
cheap on some metrics, but fairly valued at best by others.

For years, peripheral vascular intervention has attracted companies
and analysts like JuneBugs to Bug Zappers, and with similar end results
in many cases. While the promise of effectively treating narrowed or
blocked arteries in the leg is indeed a potentially multibillion dollar
promise, experienced investors have learned just how hard it is to
translate that promise into real income and cash flow.

Cardiovascular Systems (CSII)
has gone on this familiar ride. While the company seems to have
developed a legitimately better mousetrap, one for which there is strong
supporting clinical data, the company has struggled to drive consistent
utilization growth and profit leverage. Although I'm somewhat skeptical
of the company's ability to generate value for investors on stand-alone
basis, the value of this company to a strategic buyer could be
impressive.

Given the wide divergence in opinions and expectations for Forest Laboratories (NYSE:FRX),
I am a little surprised to see that the market (at least as of this
writing) has reacted pretty calmly to another disappointing quarter and
another miss. Importantly, the elements that led to the miss do not look
all that serious and the company's long-term potential appears to be
intact. That said, investors considering these shares need to appreciate
that above-average volatility is likely.

While many energy companies have spent the last few years running from their refining operations, Calumet Specialty Products (Nasdaq:CLMT)
has not only been content to be in the business, but has actively
looked to expand its operations. A focus on specialty products such as
customized lubricants and solvents has long served this company well,
but beneficial spreads have kicked in their share more recently. With an
impressive-looking dividend yield
and certain advantages to its status as a partnership, Calumet could be
a stock worth further exploration from income-oriented investors.

Wednesday, January 16, 2013

With a 25-year record of doing an acquisition nearly every year, it was probably no surprise that M&T Bank (MTB) launched another deal in 2012, though the proposed acquisition of Hudson City (HCBK)
is the biggest yet. This deal looks to be strongly accretive for
M&T Bank over the long term, just as so many of its past deals have
been. Given the bank's solid loan growth, good spread, strong expense
control, and well-earned reputation for strong returns on capital, this
is a top-notch bank. Sadly, it's also priced like one.

It's still early, but it's looking like this quarterly earnings cycle
might not be holding much in the way of surprises for bank investors.
That ought to be particularly welcome in the case of JPMorgan Chase (JPM),
as surprises at large money-center banks like this tend to be of the
negative variety. While loan losses are still elevated and both loan and
spread growth are looking feeble at present, JPMorgan continues to look
like an undervalued opportunity in the financial sector.

It's difficult to call a stock with an EV/EBITDA ratio in the 20's and
more than a dozen active sell-side analysts "undiscovered", but I'm
surprised at the relative level of chatter about Volcano (VOLC) in comparison to names like Intuitive Surgical (ISRG), MAKO Surgical (MAKO), or Abiomed (ABMD).
While Volcano arguably suffers from the fact that its addressed markets
have been around quite a bit longer, I believe growth-oriented
investors ought to take another look at some of the possibilities of
Volcano finding a new level of market acceptance and growth in the
coming years.

There are a lot of things that make Allison Transmission (NYSE:ALSN)
an interesting company. A long-time pioneer in fully automatic
transmissions, the company estimates that it sold 62% of all
medium-to-heavy duty fully automatic commercial vehicle transmissions
globally in 2011. While the company stays well clear of the passenger
vehicle market, it's not a typical commercial vehicle supplier either,
as the company does not participate in the Class 8 "line-haul" market
(intercity trucks). While the company has uncommonly good margins and
ample opportunities for growth, investors need to consider the sizable private equity ownership stakes and the large debt of this company.

Tuesday, January 15, 2013

It is not news that Wells Fargo (NYSE:WFC)
is among the best-run large banks in the country, nor that the company
has a huge franchise in residential mortgages. While the company
delivered relatively good results for the fourth quarter, near-term
trends will be challenging for this bank. Wells Fargo still offers
pretty appealing long-term potential, but investors should be prepared
for some challenges in 2013.

Like DIRECTV (Nasdaq:DTV), Dish Network (Nasdaq:DISH) must face the difficult reality that pay TV is not only a more competitive market with the entry of AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ). It also must compete with on-demand options offered by a host of services like Hulu and Netflix (Nasdaq:NFLX).
Although the company doesn't look like a tremendous value today, it has
a shrewd and savvy management team that could make things interesting.

Tough Times in Pay TV
For
all of Dish Network's potential strategic options (more on this in a
moment), the company's core satellite pay TV business has serious
challenges. While Dish Network has a solid low-cost platform and offers
products such as "Hopper" to its customers, the company has nevertheless
been losing subs.

Market share isn't everything. If a company can't take strong market
share and use it as a tool to generate superior internal financial
returns, shareholders will never benefit. In the case of First Niagara (Nasdaq:FNFG),
management has been quite willing to launch deals to build share in its
core northeastern U.S. markets, but these operations have yet to
deliver truly compelling financial or share returns for investors.

The
question, then, is whether First Niagara can start driving better
results, or whether investors are better off with other bank companies
such as M&T Bank (NYSE:MTB), PNC Financial (NYSE:PNC) or People's United (Nasdaq:PBCT).

Apparently the European Union (EU) prefers the illusion of competition
to real competition. That would be one possible conclusion from the
announcement on Jan. 14, 2013, that the European Commission (EC) has rejected the many compromises offered by UPS (NYSE:UPS) in its proposed acquisition of European delivery company TNT Express
and has chosen to block the deal. While this is a setback to UPS's
overseas ambitions, the company can likely build over time what the EC
wouldn't allow it to buy today.

Monday, January 14, 2013

Acquisitions can obviously expand a company's operations, but even
growth-by-acquisition stories ultimately come down to a company's
ability to execute. Helen Of Troy (Nasdaq:HELE)
has always been a willing (and aggressive) acquirer, and that has
allowed management to build the company into a diversified collection of
well-known home and personal care brands. The question now, however, is
whether this company can take advantage of the rampant restructurings among its larger rivals to widen its niche and gain market share.

It can be frustrating for investors to own high-quality, low-risk assets
in a "risk-on" environment, and that certainly seems to be true of late
in banking. While investors in riskier names such as Bank of America (NYSE:BAC), Synovus (NYSE:SNV) and Regions Financial (NYSE:RF) saw sizable gains in the stocks, investors in the more conservatively run People's United Financial (Nasdaq:PBCT)
had a significantly different 2012 experience. Given that this company
is unlikely to find ways to deploy substantial amounts of capital in
2013, the sluggish yield curve could point to another tough year for investors.

Software as a service
(SaaS) is still a big deal in the IT world, as is e-commerce. Put the
two together and you might have an interesting idea to investigate
further. Demandware (NYSE:DWRE) is looking to become a real player in this niche - taking on larger rivals such as IBM (NYSE:IBM) and Oracle (Nasdaq:ORCL)
with a solution that's simpler and cheaper, but still offers the
functionality that retailers need for successful e-commerce. While there
is rampant competition in this space and the valuation is indeed very
similar to Saas, aggressive investors may want to keep an eye on this
one.

Change within a company can be difficult, not to mention risky, but Constellation Brands (NYSE:STZ)
hasn't shied away from reconfiguration. Once known only for its wine
business, the company has an attractive niche spirits business and has
ponied up significant capital to take control of its Crown Imports joint
venture. While these shares are up strongly over the past year and
alcohol-related stocks are doing well now, investors may want to pause
to consider the valuation before bidding these shares up further.

Saturday, January 12, 2013

As a very loose rule of thumb, when I see a company with a solid history
of returns on capital, good market share, and a clean balance sheet
trading for mid-single digit multiples to EBITDA, I take a closer look.
In the case of Hoya Corporation (HOCPY.PK),
the debate is pretty simple - will this company ever really grow again
or not? Nobody really seems to doubt that the company's traditional
technology businesses have likely peaked (at least from a growth
perspective), but there's ample doubt as to whether the company can (or
will) reallocate its assets and build itself into a growth story once
again.

Friday, January 11, 2013

I have no doubt at all that many readers will read that article
title, snort, say "no", and move on with their day. And that's certainly
understandable - while Societe Generale (SCGLY.PK)
may not be the European bank most damaged by the Great Recession,
credit crunch, and resulting European sovereign debt crisis, they
certainly did their best (or worst) to be in the running.

Societe
Generale has emerged from this mess as a different bank, though, and the
company has gone to great lengths to improve its balance sheet and
capital position. Perhaps the question to ask with Societe Generale
isn't so much about whether it can be a top-tier bank again (if it ever
was), but rather whether it deserves to lag relative to other troubled
banks like Citigroup (C), Bank of America (BAC), and Santander (SAN).

Costs have become something of a grand obsession with commercial banks
recently, as regulatory changes have cut off formerly lucrative revenue
sources. First Republic (NYSE:FRC) is a different sort of bank, though. This bank focuses on growing its share of the lucrative high net worth (HNW) market, and it's using a "high-touch" model that has thus far generated solid high-quality growth.

Hunting the Elephants and Whales
Whereas other California banks like Wells Fargo (NYSE:WFC) and City National (NYSE:CYN)
generally try to get as many depositors as they can with a minimum of
expense, First Republic has targeted HNW individuals as its clientele.
This has enabled the company to become the No.10 bank in California (by
deposit share) and the No.26 bank in New York with only 56
deposit-taking branches in eight cities.

The universe of mining stocks has certainly changed over the past decade. The popularity of pure bullion ETFs, such as the SPDR Gold Shares (ARCA:GLD) and iShares Silver Trust (ARCA:SLV),
has given investors the option of bypassing the agonies and ecstasies
of individual companies in achieving exposure to precious metals. That
said, well-run mining companies can still offer alpha to investors. The question, however, is whether Alexco Resource Corp (AMEX:AXU) deserves to be called "well-run" and whether it can achieve its production and cost efficiency goals.

Thursday, January 10, 2013

The markets reacted to the fiscal cliff resolution last week with
relief, but the dickering and delays had real consequences to companies.
As one example, industrial distributor MSC Industrial (MSM)
saw a very pronounced stagnation of business in its fiscal first
quarter, and the Street was not happy to hear lower guidance from
management. While I expect investors to approach this stock with caution
until ISM numbers and reported growth improve, this remains a quality
long-term name for investors to consider.

By and large, I'm a big advocate of the KISS rule in investing (Keep It
Simple, Stupid). More often than not, if an investment idea takes a lot
of explanation, it's not worth the trouble. While Tower Group (TWGP)
was once a relatively straightforward P&C insurance play, the
company's proposed merger with Canopius makes this a much more
complicated investment idea. While the reasons for the merger are sound
and the potential value here is high, investors need to weigh that
carefully against the risks and increasing complexity of the company.

Merchant processing firms such as Global Payments (NYSE:GPN)
run relatively simple businesses - a customer swipes a card at a store,
Global Payments sees that the money goes where it needs to between the
banks, and it takes its cut. While there's ample competition to sign up
(and retain) merchants and data breaches are an ever-present threat,
these can be very profitable businesses with good returns on capital. In
the case of Global Payments in particular, this not only looks like a
profitable, growing business, but it's also one with an undemanding
valuation and good global growth prospects.

The for-profit education sector continues to offer up new answers for
the question, "How much worse can it get?" The economy, tighter credit
and a tarnished sector reputation continue to drive away prospective
students, and the entire sector is looking to discounts, tuition cuts
and cost-cutting to stanch the bleeding. While Apollo Group (Nasdaq:APOL) is likely to survive, investing in it still feels a little like reaching out for a falling knife.

Wednesday, January 9, 2013

Small-cap industrials can be a great source of alpha-generating
investment ideas. In many cases, investors would rather spend their time
on the latest hot tech idea than dive into the nitty-gritty of pumps,
bearings, hydraulics and the like. That said, while EnPro (NPO)
is hardly a household name, it's not immediately obvious that this
small industrial components company is significantly undervalued at
today's prices.

The water industry is a nearly perennially hot topic - almost every
investment writer looks at the trends in freshwater infrastructure and
eventually writes their "water is the commodity of the future" piece.
For better or worse, the long-term potential of many players in the
water space is pretty well accepted by investors, and many of these
companies sport valuations not only higher than non-water industrials,
but higher than what their cash flow would seem to be able to support.
So it is worth asking, then, whether the well-run and well-respected Gorman-Rupp (GRC) is indeed overpriced today, or whether discounted cash flow just isn't an effective way to value this stock.

American aluminum giant Alcoa (NYSE:AA)
deserves credit for the internal operating improvements it has made in
recent times. Unfortunately, the company is still in the business of
selling aluminum and aluminum products, and that has long been one of
the least attractive industrial metals for investors. While Alcoa does
continue to look undervalued on the basis of historical valuation norms,
this stock will probably be a value trap until and unless aluminum prices start picking up.

2012 was a pretty good year for investors prescient (or aggressive) enough to get in early to housing-sensitive names such as Louisiana-Pacific (NYSE:LPX), Mohawk (NYSE:MHK) and Valspar (NYSE:VAL).
While housing hasn't really recovered just yet, investors seem happy
enough with signs of a real bottom and the improving sales at the home
improvement warehouse chains. Curiously, however, despite a meaningful
exposure to these markets RPM International (NYSE:RPM)
hasn't shared in all of the enthusiasm. Now the question is whether it
should, and whether that catch-up trade can fuel further gains in the
shares.

Steel stocks rode up into the start of 2012 on optimism in the fall of
2011 that there would be an improvement in non-residential construction
and industrial demand to deliver sustainably higher prices and good
shipment growth. That didn't really materialize as hoped, and the stocks
of minimill operators Commercial Metals (NYSE:CMC), Steel Dynamics (Nasdaq:STLD) and Nucor (NYSE:NUE) all underperformed the S&P 500.

Now
it's a new year and there's new optimism that the industry is past the
worst. Will that optimism pay off a little better this year?

For those investors who've been waiting for a pullback in perpetually expensive Yum! Brands (NYSE:YUM),
here's your chance. Tougher consumer conditions in China, combined with
a scandal related to excess antibiotics in chicken served by YUM's
Chinese KFC stores, have led to a major slowdown in Chinese sales and
taken the shares with them. Given that the impact of this scandal/scare
will almost certainly be fleeting, this could be a rare opportunity to
get shares at a more reasonable price.

Tuesday, January 8, 2013

The Street is in one of those stretches where it wants to like Monsanto (MON),
so it doesn't look like analysts or investors are being too pointed in
how they approach results for the fiscal first quarter. While the
results were indeed solid overall, and Monsanto remains a high-quality
play in the agriculture space, there were a couple of details that
investors shouldn't ignore before paying up for what is by no means a
cheap stock anymore.

For all of the talk of "catalysts," it's easy to think that Wall Street
has a short attention span, and that may not be far from the truth. At a
minimum, the Street is quick to incorporate new information into stock
prices, and stocks can languish in the absence of a constant stream of
positive news. That leaves Atwood Oceanics (NYSE:ATW)
in a potential predicament for 2013. While Atwood has done an
impressive job of realigning its fleet towards higher-value assets, the
lack of new contract opportunities could leave the stock trading on
reported margins, industry pricing trends and prospects for a MLP conversion.

Many analysts and investors have worried about the outlook for growth in
the United States in 2013, but railroad data continues to suggest an
ongoing recovery/expansion in the economy. Although it's true that the
rails have enjoyed an uncommonly long stretch of good performance
relative to the markets, ongoing demand growth could continue to support
the sector.

December's Data Looks Very Familiar
The
Association of American Railroads reported that U.S. rail carload
volume declined about 4% for the month of December relative to the prior
year, while climbing more than 2% from November's level.

As has
been the case for quite some time, coal and grain traffic declines were
a major negative influence on the results. Coal volume declined by more
than 13%, while export declines tied to this year's drought helped fuel
a 14% decline in grain carload traffic. Excluding coal, carload traffic
was up more than 3%, while traffic excluding coal and grain climbed 6%.

MeadWestvaco (NYSE:MWV)
has always been a little more willing than average to realign its
business towards better long-term returns for shareholders. To that end,
the company has been willing to divest/sell businesses (including its
consumer and office products business (which merged with ACCO Brands (NYSE:ACCO))
while acquiring packaging and chemicals businesses in faster-growing
areas like Brazil and India. That said, while MeadWestvaco does indeed
look like a well-run packaging and specialty chemicals company, it's
difficult to generate a cash flow scenario that suggests these shares are dramatically undervalued.

Prior to its presentation at the annual JPMorgan Healthcare conference, MAKO Surgical (MAKO)
released some limited information about its fourth-quarter results.
While MAKO avoided the big miss that some investors had feared, and
system placement performance was in line with expectations, utilization
continues to be a meaningful concern for this company.

Q4 Data - Placements Okay, Procedures Less So
For
the fourth quarter of 2012, MAKO Surgical reported that it had sold 15
RIO systems around the world, basically matching Wall Street
expectations. While two of the sales were overseas and appear to have a
meaningful deferred revenue recognition treatment, that's a quibble at
this point. It's worth noting, though, that while this performance
matched expectations, the full-year placement number of 45 was well
below the guidance management gave a year-ago for 56-62 placements this
year.

At first blush, Amira Nature Foods (ANFI)
looks as though it may offer investors two relatively rare
opportunities - a direct investment in India and an investment in a
relatively early-stage food brand. While there are abundant risks with
this name, this is also an uncommon opportunity. Investors may benefit
not only from the rising consumer income levels in emerging markets, but
also a food company that is at a point in its lifecycle where both
revenue growth and margin leverage are up for grabs.

Monday, January 7, 2013

The "will they or won't they" between Roche (OTC:RHHBY) and Illumina (Nasdaq:ILMN)
has continued to spur rumors and debate ever since Roche walked away
from its bid for the leading gene sequencing company earlier this year.
Rumors in the fall said that Roche was working on yet another bid, while
subsequent rumors claimed that agreements had been reached at $60 per
share or even $66 per share. Given reports of Roche chairman Franz
Humer's statement to a Swiss newspaper on Sunday, however, it looks like
this deal is off once again.

It has been a rough few years for deepwater drilling specialist Transocean (NYSE:RIG). In addition to a recent cyclical
downturn in offshore drilling, the company seemed to fall behind a bit
with its fleet and started losing business because of unexpected
downtime issues. Worst of all, however, was the terrible BP (NYSE:BP) Deepwater Horizon/Macondo rig accident and the substantial financial liabilities that the company incurred for its role in the accident.

Now,
however, things seem to be turning around. The company has taken steps
to improve its fleet and rates are back on the way up. Most importantly,
at least in the near term, Transocean has reached a very favorable
settlement with the Department of Justice for its Macondo liabilities,
suggesting that the company is close to having this matter behind it.

By and large, it's hard to get excited about owning paper and paper
packaging stocks for the long term. A few strong operational stories
such as Rock-Tenn (NYSE:RKT) and Packaging Corp (NYSE:PKG)
have outperformed, but by and large this is an industry with very
modest revenue growth and highly variable input costs. All of that said,
I think investors should take a closer look at Graphic Packaging (NYSE:GPK).
Not only has the company made good progress with operating
efficiencies, it is also a long-term deleveraging and diversification
story.

There's a saying out there (from Warren Buffett,
I believe) that goes something like "whenever a great management team
and a lousy industry come together, it's the industry that maintains its
reputation." That warning would seem to apply to Rock-Tenn (NYSE:RKT)
these days as although the company's stock has done reasonably well,
management continues to struggle to deliver on the potential synergies and operational improvements at the former Smurfit-Stone assets.

The
crux of the Rock-Tenn argument is pretty simple. If Rock-Tenn can do
with Smurfit-Stone's corrugated packaging assets what it did previously
with its own paperboard/containerboard assets, this will be a large and
profitable company. If Rock-Tenn cannot lift up those Smurfit-Stone
assets, then the company will languish from a value-destroying deal that
levered the balance sheet and saddled it with lesser assets.

I'm pleased with these results. The beta in my A portfolio ticked up slightly in Q4, while the Portfolio B beta ticked down a bit, but they continue to perform basically the way I want (B being the lower-beta portfolio).

I won't go through a complete performance attribution, but I will say that the follow were major positive (and negative) contributors for the year:

Clearly biotech was a big positive contributor to 2012 results, and I can say that various buyouts within my portfolio were a big help as well. By no means do I expect to replicate 2012's results this year, but here's hoping!

Friday, January 4, 2013

Silver has always been the redheaded stepchild of gold throughout human
history. While its beauty, scarcity and utility have certainly been
appreciated since pre-history, silver
just isn’t as rare as gold and has never been esteemed as highly. For
much of history, though, silver has been money. While the
average laborer (or peasant) probably never saw a single gold coin in
their hands in their lifetime, silver money was a different story.

Playing the mix-and-match merger and acquisition game is a favorite
pastime of bored med-tech analysts everywhere, and it doesn't hurt that
the combination of below-average deal activity in 2012 and the advent of
the medical device excise tax in 2013 point to more deals on the way.
Today, though, I wonder whether or not a large med-tech company will
step up and acquire privately-held Dune Medical and its potentially revolutionary MarginProbe cancer detection system.

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I started this blog as a way of archiving my writing for sites like Investopedia, as well as posting some thoughts on the markets, stocks, or whatever else strikes my fancy.
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You can reach me at tuonela (dot) fool (at) gmail (dot) com

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Information is taken from sources believed to be reliable but no warranty or guarantee is made with respect to accuracy.

Investing involves risk and requires proper due diligence. In no way should a reader should presume this blog represents personalized financial advice or is a substitute for proper due diligence. The author expects you to be enough of a grown-up to realize this.